Listen to this podcast to learn:
- Why this physician perfected a system to educate other professionals about the advantages of commercial/multifamily real estate investing.
- How to get into larger multimillion dollar commercial properties with direct fractional investing.
- How to avoid management headaches most people struggle with in real estate investing,
- The five different ways to make money in real estate investing.
- What to look for before investing your money with a real estate investment firm,
Please visit www.nesteggrx.com to learn more about Dennis Bethel, to sign up for his free audio training in real estate investing and to explore his blog.
Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines. Today, I’ll be talking with Dennis Bethel, founder of NestEggRx, a real estate investment firm with the mission to help doctors and other health professionals diversify into real estate without any of the management headaches. Dennis, good morning, and how are you today?
Dennis Bethel: I’m doing great. Thanks for having me.
Josh Mettle: Absolutely, you’re welcome. I found your website highly interesting, and I have a couple of questions for you, but the first thing that really struck me as interesting is that you’re a physician yourself, and I found your start in the commercial real estate very interesting. Will you tell the listeners a little bit about your background?
Dennis Bethel: Sure. It would be my pleasure. I graduated from the University of Minnesota in 1998, and from there, I went on to do my emergency medicine residency in Fresno, California. Following that, I moved to New Mexico and became a hospital employee. At that time in my life, I knew little to nothing about the business, investing, finance. So, what I did was I followed my colleagues in investing in index mutual funds. During that time, I read a lot, and as I learned more, I was finding that I didn’t enjoy being in the stock market. I hated the volatility, and I discovered real estate, so that’s kind of when I started my real estate investing career. Like most people, though, I started in residential property. I bought fourplexes in Albuquerque, New Mexico, and while I did well with that, what I was finding was that I was frustrated with the lack of economies of scale. I was frustrated with the management headaches. So, I actually just kind of stumbled into direct fractional investing and commercial multifamily by accident.
What happened was a partner of mine in the emergency department approached me one day and said, “Hey, my wife is a real estate agent. She is putting together this deal where a few of us are gonna come together and buy this 72-unit property, one block from the University of New Mexico. Do you want to invest?” And so, we went ahead and did that, and Albuquerque wasn’t the best market to invest in and on top of that, we weren’t using professional property management. It was kind of a self-managed kind of thing. But even with those handicaps, we still made quite a bit of money in a short period of time, so the experience itself was – it was eye opening, and that’s when I went out, and I decided that I wanted to perfect this process.
Josh Mettle: Well, I too, was drawn into real estate for almost the same exact reasons in that I hated the volatility and started down the world of self-management, so I’m interested to hear more about that. So, that brings us to at least me to start thinking about your mission statement, which I found on your website, which was to help doctors diversify into real estate without any of the management headaches. So, as someone who owns and manages rental units myself, that’s sounds very attractive. How realistic is that and tell me how it’s possible?
Dennis Bethel: Well, it’s definitely realistic, and like I said being someone who managed my own properties for years, it was something that I knew I didn’t want to continue to do, and so let me tell you a story. One day, shortly after the financial collapse in 2011, I walked into the physician’s lounge, and two of my colleagues, and they were both around 60. They both had 30-year distinguished careers, and they’re sitting around, lamenting the fact that they can’t retire, that they feel trapped, that they’re working fulltime trading their hours for dollars and they were kind of perplexed at how I was 20, 25 years younger than them, I had two young kids, and I’m only working part-time. And so, that experience was eye opening to me. I was grateful for the decisions that I made but sad for my partners, and I realized that a lot of other doctors and medical professionals are in the same boat, and I knew that I could help. So, what I do is I educate people on the benefits of commercial/multifamily real estate investing, and I educate them on how to get into larger multimillion dollar commercial properties to direct fractional investing. I also show how to avoid all the management headaches that I experienced, and what I learned is when I transitioned out of residential into commercial/multifamily, I discovered that there were private real estate investment firms and professional and property management firms that were only available with larger and higher quality assets. And so, I subsequently developed business relationships in professional acquisition and management with these professional acquisition and asset management firms. They can help me, medical professionals, get into the space.
Josh Mettle: That makes a lot of sense. I know, just from our own properties, where we own some smaller apartment units here in Salt Lake area that finding professional management is a real challenge, and we’ve bumped up against that same issue where if you don’t own a larger unit property, it’s just really hard to get a good manager in there. So, that makes a lot of sense to me.
Dennis Bethel: Yeah. I struggled for years with do I self-manage or do I get a residential property manager, and unfortunately, many of the residential property managers are mom and pop type firms and their business is based on volume.
Josh Mettle: Right.
Dennis Bethel: Because they make a small amount of money on each property, they have to have a lot of properties, and so, unfortunately, I’ve fired so many residential property management firms because I could do a better job than them, but when you get into bigger space, it’s impressive with what you can find.
Josh Mettle: Yeah. That’s great. I appreciate the answer. So, now obviously you have or had money invested in the same properties, so I’m assuming that you still do and tell me a little bit about these properties and how these have performed for you?
Dennis Bethel: Yeah, absolutely. I definitely do invest my own money and with the properties that I have, it depends on how long you’ve held them, but in general, the returned me anywhere from 4 percent to 9 percent cash on cash or yield as the cash that I get was the longer I have them, the bigger that gets. Having said that, when I factor in any appreciation and principal pay down on the loans, every property I own, I get double-digit returns every year on those.
Josh Mettle: And that’s another I think one of my questions that I had that I may just want to skip right to it which is on your website, I noticed that you’ve listed four different ways to make money in real estate. So, do you want to just go ahead and give us a brief overview of each of those four ways?
Dennis Bethel: Absolutely.
Josh Mettle: Great.
Dennis Bethel: That’s one of the reasons why real estate is so powerful is that there are four unique benefits to that. I can’t think of any other investment that has four unique benefits. The first and very attractive one is cash flow or the yield, and that’s the monthly or quarterly checks that the investors get from the operations of the property. Second is the appreciation or the growth of the property. Unlike residential real estate, which is valued on that comp model, commercial multifamily is valued based on an income approach. So if you can raise rents, you can decrease expenses or increase retention, then your property can appreciate significantly year after year as long as you’re in quality markets.
Josh Mettle: Right.
Dennis Bethel: The third benefit would be principal pay down. So, in the size of the properties that we’re getting, our renters are paying down the principal on the loan anywhere from $50,000 to $150,000 a year. So, that’s a nice chunk of equity that we’re gaining every year as we go along with our property. The last benefit is the tax benefits, and real estate has amazing tax benefits. There are ways that you can take the cash or the yield, as well as the equity at minimum tax advantage, but many investors are taking that money tax-free. Now, having said all that, since I wrote that article, really there’s an obvious fifth benefit to real estate, which I didn’t include in there, and it’s an amazing hedge against inflation. As inflation increases, rent increases. As rent increases, the value of the property increases, and historically, real estate has stayed well above CPI in times of inflation. So, for those of us who believe that inflation is coming, real estate is a beautiful thing.
Josh Mettle: I was just reading an article this morning, talking about money flow and the amount of dollars or universal currency in the world being at an all-time high at about $66 trillion, up $3 trillion in the last 12 months, and how it was – a very interesting article tying that to an inflationary reaction of all kinds of asset classes. But of course, if you’re in bond fund or if you’re in a money market fund, you don’t keep up with that, and it was strongly arguing that due to those factors of money supply and the amount of liquidity on the sidelines and sitting in bank accounts across the world that there would be a strong reason for inflation, and I agree. I think we’ve had an incredibly low inflation rate, at least from a government calculation standpoint and that things are moving up, and that’s probably the number one reason why I’m in real estate exactly because of that hedge.
Dennis Bethel: Absolutely, absolutely. The amount of money that we’ve been printing, there’s a cost to that, and I’d rather be in something that stays well above CPI with something that doesn’t.
Josh Mettle: As you were walking those four or five benefits to owning the properties, I couldn’t help but think if you could walk us through like a real-life transaction. In other words, what’s the entry look like? We talked about the yield. We talked about the appreciation, the principal reduction, and tax benefits, but if you could just walk us through entry into one of these investments, what that looks like maybe over a few years and then what a potential exit would look like.
Dennis Bethel: Sure, absolutely. So, what happens is that there are groups of people like myself who go out and we’re kind of acquisition specialist. We look for properties. We find properties, and we maintain networks of interested investors who want to invest in real estate. So when a property that meets our acquisition requirements, then we will reach out to our investor network and say, “Hey, listen. We’re gonna have a webinar on this date, and we’re gonna talk about our latest acquisition, why we think it’s a good acquisition, what we think the expected returns will be from this acquisition, why we like this market, and why we think this market is gonna continue to grow.” And so, from that webinar, the offering will fill quickly. We will close on the property, and then, there will be a closing webinar talking about the property, what are our plans are going to be for the first year, for the third year, for the fifth year, those kinds of things. We’re long-term holders. I mean, real estate is like a religion to us. We believe in real estate, as long as the market is a profitable market, and we’re in the best markets in the country. We’re going to hold and make money, and so, what we will do is we will keep the property. We will improve the property, and our cash flow, our distributions to our investors will increase over time. Now, what we’re trying to do is we’re trying to bump net operating income or NOI at least 20 percent over a five-year period. If we can do that, then oftentimes, it makes sense to refinance the property. So, if we can refinance the property after five, six years, then we can return a chunk of money back to the investors tax-free because refinances are tax-free, and yet, they maintain their interest in the property. So, in that way, the model is going to be cascading type of model where one property can become two properties, two properties can become four properties over a period of time without really putting much new equity into the model. Having said that, I like to put new capital into the model because then you accelerate it even further from there.
Josh Mettle: And so, when you’re buying these properties, are you typically paying cash? Is there some sort of bank note that goes along with it?
Dennis Bethel: No, yeah. We leverage the property. We usually will put 25 percent down on the property and finance goes 75 percent.
Josh Mettle: And that financing is some sort of a non-recourse or who signs for that?
Dennis Bethel: Absolutely, it’s a non-recourse and all of our deals go into a limited partnership where the principals in the private asset, in the private real estate company are the general partners, and then the investors are the limited partners. These are non-recourse loans, so there is no risk to the investors other than the initial capital risk, and that’s how we structure our deal.
Josh Mettle: And so the limited partnership itself is signing for the loan?
Dennis Bethel: Yes.
Josh Mettle: Got it. Okay, great. How many investors typically will each property bring with it? Does that just depend on the size and scope of the project?
Dennis Bethel: Absolutely. Our minimum investment is $50,000. So, depending on the size of the project, we can have a smaller, at least 20 investors, and we have the largest, 50 investors in a deal, and just depends on how much the investors are bringing, how much the property costs, and what the capital needs are of the property.
Josh Mettle: Great, and then they have the cash flow distributions, which I think you said were quarterly. So, is that how typically how an investor would receive their cash flow distribution?
Dennis Bethel: Yes, quarterly. That’s how we do it in our company.
Josh Mettle: And who manages and does the accounting of all of those funds?
Dennis Bethel: Asset management comes from the private real estate asset management firm.
Josh Mettle: Okay.
Dennis Bethel: And so, they do the asset management. Now, what we do is we find either local or regional property managers that we vet to run those properties. We have existing relationships in the markets that we’re in, and we’re very happy with the companies we use. Of course, we go to the properties quarterly and to physically inspect the properties quarterly, and should there ever be – not that there has been – but should there even become an issue with the property management firm, we’re in markets where there are multiple –
Josh Mettle: Right.
Dennis Bethel: Multiple property management firms that we can choose from.
Josh Mettle: And does the property management firm then do the distribution to each of the investors?
Dennis Bethel: No. They come from the asset management firm. What happens is, the property management firm reports to the asset management firm regularly, weekly. They have monthly meetings and they report to the asset management firm. The asset management firm will then do the distribution to the investor, and in fact, transparency in this is very nice, it’s something I appreciate. In that on a quarterly basis, not only do you get your check, but you get a letter from the asset manager. You get a letter from the property manager. Both of them are reporting on the property, and then you get the full financials where everything, all the income, all the liabilities. So, you’re constantly getting information as to how your property is doing.
Josh Mettle: That’s great. I love the way that that’s set up. So, let’s say that you were in that property for 5 or 10 years, and then, walk us through a scenario in which you may decide to sell that and the second question would be who are the decision makers on when the property is to be sold, and what kind of consensus does that require?
Dennis Bethel: Okay, so the decision maker on that is going to be the private real estate investment firm, the principals of that, but I can tell you how that decision is made. They vet the markets extensively, and so, what will happen is if they see any of the numbers softening and definitely if they cannot increase net operating income two years in a row, they will sell the property. And then, they will look into – obviously each individual investor can get their money back if they want or in my mind, the better way to handle that is to do a 1031 exchange.
Josh Mettle: Right.
Dennis Bethel: Having said that, the goal, like I said, is to be long-term holders of real estate, so as long as the market is strong, we’re not looking to get out. Now, most of our investors feel the same way. They’re long-term holders. They enjoy getting their cash flow checks on a quarterly basis, but every year, we have three, four, or five folks who need to get out and most of the time, that due to a hardship. Well, real estate tends to be an illiquid asset. We’ve never had any problems with somebody getting out. The way our process works is that you can sell back to the existing investment group, and as to date, everybody who has wanted to has been able to do that, either at or above their original investment with no penalties.
Josh Mettle: That’s great. That’s great. Yeah, I mean I’m just putting myself in a physician’s situation where they’re trying to get out of the day-to-day of doing the business of being the physician, and so, why take the capital back? You just put yourself that much farther back from retirement, so it makes complete sense. So, I don’t ever mean to throw a fastball at any of our guests, but it’s a question that I always think is on people’s mind and begs to be asked, and so, tell me what kind of oversight your investors have and what assurances or protection do they have against running into a Bernie Madoff-type of situation with their hard-earned money?
Dennis Bethel: I think you hit the nail on the head with that question. I mean, we all know that all investments have risks. Having said that, before you invest in anything, you really – it’s incumbent on you to make sure that you have 100 percent eliminated risk of fraud. Having said that, I think you’re ahead of the curve if you’re investing in hard assets like real estate. Unlike paper assets, to me real estate is something you can visit. You can touch it. You can see it. You can inspect it, those kinds of things, and I never recommend people to invest with a firm that hasn’t been in business for at least five years and doesn’t have multiple assets. Because once you’re talking about firms of that size, then, you can basically verify their track record. You can make sure how do they do what they say they do, and probably most importantly, are their investors happy? I mean, you need to talk to several of their investors; but in addition to all of that, I mean real estate transactions do not happen in a bubble. I mean, there are multiple third-party people that have to be involved in these types of transactions. You have to have a mortgage broker, who puts together a loan. You have to have a real estate attorney who negotiates and draws up the contract. You have to have an insurance company that provides an insurance binder. There’s a third-party property management firm and all of the service providers that come along with them. Those are all areas of people, in which you can do your due diligence, which you can speak to that are directly employed by the company that you’re investing with. On top of all that, many states are full-disclosure states, so you can go down to the city or county record office, and you can verify who owns the properties. So, in my mind, it’s very important to do your due diligence before you invest in anything, and for me, I feel much safer investing in this type of asset because I’ve done my due diligence. I checked out these companies, and I’ve not invested with anybody that I didn’t look into ahead of time. So, I think that’s your ability to leverage your knowledge of who you’re investing with is exceptional in this asset class. As I said earlier, once you do feel comfortable and you do business in this kind of stuff, the reporting that you get is fully transparent.
Josh Mettle: Right. That’s great. I appreciate you fielding that question. That makes a lot of sense to me. I’ve always thought anything that you can see, touch, and feel like an apartment building was a lot more secure and real to me than it was wiring money to a broker somewhere who invested in some fund that we can’t really wrap our arms around. So, I appreciate you fielding that one.
Dennis Bethel: Yeah. And the thing is it’s just really important to me – that money is hard to come by, so you want to make sure that you’ve invested in something that’s going to give you quality returns, but it’s also safe.
Josh Mettle: Yeah. It just sparked in that follow-up question to actually the question I had before which was if the investors in these assets that are slated for long term, if they run into those financial hardships and they need that money back, is there any sort of penalty for withdrawal?
Dennis Bethel: No. There is no penalty. Like I said, liquidity is an issue with real estate. Having said that, when you have a quality asset that’s producing quality income, few people really care or want liquidity, but there are four or five people a year that, for hardship reasons, want out, and there’s never been a penalty with us, and everybody who has wanted out has been able to get out either at or above their initial capital investment.
Josh Mettle: That’s great, okay. So it appears to me that every investment has some sort of downside or risk or everybody would be in that class if there was no downside or risk. So, it’s very rarely talked about on the front end of being solicited for the investment. So, would you give us the inside scoop on what the downside or potential risks are for this type of investment?
Dennis Bethel: Sure. Here’s the way I think of it. The vast majority of the people in the world who are wealthy made their money in one of two ways. They either made their money in business or in real estate. Now, we’ve all heard that 9 out of 10 new businesses have failed, so that’s a 90 percent failure rate. I contrast that with real estate, at least the way we invest it. We invest in the best markets around the country in properties that conform to Fannie Mae underwriting standards. So, in commercial multifamily, those properties have a national foreclosure rate of 1 percent to 2 percent. Now, we know the best markets ‑ the markets we’re in ‑ that’s a sub 1 percent foreclosure rate. So, when I contrast a 90 percent failure rate versus a 1 percent failure rate, for me, it’s an easy decision. I know where I’m going to put my money. Over top of that or above that, the folks I work with, they’ve never lost a project. They’ve never had a cash call. They have an excellent distribution rate, and a long history of satisfied clients, and those are all critically important to me. So, is there risk? Absolutely, but I look at this, as long as I’m in the right market with the right people, I look at this as a low-risk type of investment, and I think that’s probably where if you’re in the wrong market or if you’re with the wrong people and then, you do have some risks, but for me, this was an easy decision to invest this way.
Josh Mettle: Yeah. So, I guess the downside risk is you get some sort of a crazy real estate market where all of the buyers are gone, and there’s more sellers than buyers, but then, even in a situation like that, if you’re a long-time holder, if you’re not selling during that market, that’s really not a risk. So, I’m just trying to think through how these things could potentially go wrong and really the only other way would be that you had inept management that wasn’t keeping up with things and keeping the thing full, because even if the valuation that you could – the mark-to-market so to speak – where could I sell it at this moment, if that’s gone down, if you’re not a seller, you haven’t lost anything. You’re still living on your cash flow and principal reduction and tax benefits.
Dennis Bethel: I think everything you said there is true. On top of that, what you’re really tapping into is market risks, and we’ve had our markets. We have 20 different evaluation points. We vet our markets, and we reevaluate them every six months. And so, basically what you’re talking about is somebody who’s investing in Detroit or a Las Vegas type of situation where what happens with real estate it really follows population cycles as opposed to the financial markets, they follow the economic cycles. Real estate follows the population cycle, so, population follows jobs. So, basically we’re doing is we’re going to markets where there’s lots of jobs and lots of population growth. And so, when you’re in those markets, it’s very hard to lose money. I mean, when you’re talking about going to properties that have 95 percent historical occupancy and buying properties that have 70 percent or 75 percent breakeven occupancies, your property management firm would have to be five orders of magnitude of incompetence for you to lose money in those types of markets. Now, having said that, as you’re going into the markets or you’re buying local just because it’s local and not knowing what your market is like, if you’re going into dying marketplaces like Detroit where the population growth and the job losses have been astronomical, those are definitely places where you can lose, but again, I think there’s a difference in investing in a market where you know you’re going to get quality returns or investing in a private real estate firm that knows what they’re doing and has a historical track record of doing what they say they can do, that’s the difference. I mean, a lot of times, what happens is doctors either avoid real estate because it’s again, “I don’t want to do the management headaches,” or what they say is, “Well, I know this is a quality asset class, so I’m going to take the plunge.” And then, they buy a single-family house or duplex that’s a couple of miles away so they can drive by, and they have no knowledge of whether their market is quality or not quality.
Josh Mettle: Absolutely. That makes a lot of sense to me, and I know just with our own properties, not even being across the country but just being in different areas in our state, you’re exactly right. The location and where the jobs are strong, the asset will continue to appreciate, even when we’ve had some downtimes. Our properties that are in the right location, near the job centers, the values have always remained very strong and rents and cash flows remain strong as well. So, that makes a lot of sense to me.
Dennis Bethel: Yeah. I mean you could even invest in a quality market, but if you don’t know the submarkets, you don’t know the war zone type areas, if you’re in the wrong area and you’re going to buy a headache.
Josh Mettle: Yeah. Well, I always know it’s been a good interview when 30 minutes goes faster than I’d like it to. So, let’s wrap with this. I appreciate you sharing the four now five ways to make money in real estate. I think we’ve uncovered a lot of information here that I think our listeners will find of use. How do they find out more about these opportunities and where can they contact you?
Dennis Bethel: My email is dennis@nesteggrx.com. So, that’s dennis@nesteggrx.com, and my website is www.nesteggrx.com. You can contact me through the website. You have my email. Whether you invest with me or not, real estate is my passion. I love real estate. So, if I can help you in any way, feel free to contact me.
Josh Mettle: Dennis, thanks again. It was a pleasure. We look forward to connecting with you soon. Thanks so much for your time.
Dennis Bethel: Hey, Josh. Thanks a lot. I appreciate it.
We always welcome your comments and questions!
